Small Business Management Chapter 20 Busby LSCO

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CHAPTER
20
Managing
Human Resources

LEARNING OBJECTIVES
By studying this chapter, you should be able to…
20-1 Explain the importance of employee recruitment, and list some
useful sources for finding suitable applicants.
20-2 Identify the steps in evaluating job applicants.
20-3 Describe the roles of training and development for both
managerial and nonmanagerial employees.
20-4 Explain the various types of compensation plans, including the
use of incentive plans.
20-5 Discuss the human resource issues of co-employment, legal
protection, labor unions, and the formalizing of employer–
employee relationships.

INTRODUCTION
• Human resource management (HRM) – The
management of employees in a way that
enables them to help a company reach its
strategic objectives.
• This can only be achieved if highly capable
employees are recruited, trained, assessed, and
given incentives to reach their greatest potential.

20-1 RECRUITING PERSONNEL
• Recruitment brings applicants to a business.
• The goal is to obtain a pool of potential employees large
enough to contain a number of talented prospects.
• In a subsequent stage of the selection process, management
decides which applicants are “keepers.”
• Over 60 percent of the CEOs of Inc. 500 companies
identify attracting and retaining skilled employees as
their greatest challenge.
• Despite painstaking recruitment efforts, many small
business owners indicate that they simply cannot find
prospects with the skills and qualifications that they
need, and the problem only gets worse when labor
markets get tighter.

20-1a The Need for
Quality Employees
• It makes no sense to hire more employees unless the total costs
involved will be more than offset by the additional sales their hiring
yields.
• Recent analyses reveal that startups are launching with far fewer
employees today than they did in the past.
• Recruiting good employees can boost the overall performance of
a small business.
• Interactions between two or more high-impact employees will often
lead to outcomes significantly greater than the sum of their individual
contributions.
• Since payroll is one of the largest expense categories for most
businesses, wise employment decisions can have a direct impact
on the company’s bottom line.

20-1b The Lure of
Entrepreneurial Firms (slide 1 of 2)
• Competing for well-qualified business talent requires small firms to
identify their distinctive advantages.
• There are many good reasons to work for an entrepreneurial
business.
• Many small businesses are in an excellent position to offer
opportunities for high-level achievement, job variety, interesting
experiences, personal recognition, and the potential to do work that
they believe is important to prospective employees.
• Because of their small size and limited staff, entrepreneurial
companies allow new managers to work more closely with the CEO.
• Rather than having to work their way up the corporate ladder,
capable newcomers can quickly move into positions of responsibility
in a well-managed small business.
• Small firms can structure the work environment to offer personnel
greater job variety and freedom than they would normally have in a
larger business.

20-1b The Lure of
Entrepreneurial Firms (slide 2 of 2)
• There are also drawbacks to working for a
small company.
• Managerial blunders are harder to absorb and thus
tend to be obvious to everyone.
• Support systems from legal or human resource staff
may not be readily available.
• Limited employee benefits can lead to high levels of
turnover and constant changes in personnel.

20-1c Sources of Employees
• Recruitment sources include:
• The Internet.
• Schools.
• Public and private employment agencies.
• Temporary help agencies.
• Employee referrals.
• Executive search firms.
• Headhunters – A search firm that identifies qualified
candidates for executive positions.
• Walk-ins and help-wanted advertising.

20-1d Diversity in the Workforce
• The composition of the U.S. workforce is becoming more diverse
over time with respect to race, ethnicity, gender, and age.
• Workforce diversity – Differences among employees on such
dimensions as gender, age, ethnicity, and race.
• Hiring more workers from diverse groups can help a company
maintain good relations with an increasingly heterogeneous
customer base.
• Many small businesses are tapping immigrants as a source of
workers, and this presents a potential problem.
• While most of these employees are authorized to work, a certain
portion of them are not.
• Hiring illegal or undocumented workers is a punishable offense and
can lead to fines or the suspension or revocation of a company’s
business license.

20-1e Job Descriptions (slide 1 of 3)
• A small business manager should analyze the
activities or work to be performed to determine
the number and types of jobs to be filled.
• Knowing the job requirements permits more
intelligent selection of applicants for specific
positions.

• An owner-manager should not select
personnel simply to fit rigid specifications of
education, experience, or personal
background.
• Rather, he or she must concentrate on the overall
ability of an individual to fill a particular position in
the business.
• Making this determination requires a job description.
• Job description – An outline, or summary, of the work to be
performed for a particular position.

• Any analysis of a position should include a job
specification.
• Job specification – A list of the knowledge, skills,
abilities, and other characteristics needed to
perform a specific job.
• Well-developed job descriptions can help with
employee recruitment, but they can also be
useful in other ways, such as:
• Bringing focus to work performed.
• Providing direction to training.
• Serving as a guide for performance reviews.

20-2 EVALUATING PROSPECTS
AND SELECTING EMPLOYEES
• To reduce the risk of taking an uninformed
gamble on applicants of unknown quality, an
employer can follow these steps:
1. Use application forms.
2. Interview the applicants.
3. Check references and other background
information.
4. Test the applicants.
5. Require physical examinations.

20-2a Step 1: Use
Application Forms (slide 1 of 2)
• By using an application form, an employer can
collect enough information to determine
whether a prospect is minimally qualified and
to provide a basis for further evaluation.
• Typically, an application asks for the applicant’s:
• Name.
• Address.
• Social Security number.
• Educational history.
• Employment history.
• References.

20-2a Step 1: Use
Application Forms (slide 2 of 2)
• Although an application form need not be
lengthy or elaborate, it must be carefully
written to avoid legal complications.
• In general, a prospective employer cannot seek
information about:
• Gender.
• Race.
• Religion.
• Color.
• National origin.
• Age.
• Disabilities.

20-2b Step 2: Interview
the Applicants (slide 1 of 3)
• An interview permits the employer to get some idea of an
applicant’s job knowledge, intelligence, and personality.
• Although the interview can be a useful step in the selection
process, it should not be the only step.
• Research has shown that the typical job interview (unstructured and
unfocused) is of limited value in predicting success on the job.
• Behavioral interviews – An approach that assesses the
suitability of job candidates based on how they have responded to
specific employment-related situations and looks for patterns in
past behaviors.
• The behavioral interview is designed to get a sense of the applicant’s
past performance and likely responses in future situations.

20-2b Step 2: Interview
the Applicants (slide 2 of 2)
• Just as in application forms, it is very important
to avoid asking questions in an interview that
conflict with the law.
• It’s important to remember that employment
interviewing is actually a two-way process.
• The applicant is evaluating the employer while the
employer is evaluating the applicant.
• In order for the applicant to make an informed decision,
she or he needs a clear idea of what the job entails and an
opportunity to ask questions.

20.1 Topics to Avoid in an Interview (slide 1 of 2)
Children. Asking about children may indicate an employer’s concern about child
care needs, and it singles out women.
Age. The Age Discrimination in Employment Act prevents employers from
asking applicants their age or even about life events that could indicate age,
such as their year of high school graduation.
Disabilities. The Americans with Disabilities Act does not allow discussions
regarding mental or physical disabilities until after a job offer has been made.
Physical Characteristics. Talking about height, weight, or other physical
attributes can lead to discrimination based on those features.
Maiden Name. It is okay to ask an applicant’s name, but asking for a maiden
name can lead to discrimination based on marital status and, potentially, ethnic
background.
Citizenship. The Immigration Reform and Control Act allows a company to ask
if applicants have a legal right to work in the United States, but inquiring about
citizenship can lead to claims of discrimination based on national origin.

20.1 Topics to Avoid in an Interview (slide 2 of 2)
Lawsuits. It is against federal and state laws to ask applicants if they have filed
suit against a previous employer, a measure intended to protect whistleblowers
from potential retaliation.
Arrest Records. Applicants can be asked if they have ever been convicted of a
crime, but an arrest record does not necessarily reflect criminal activity (if the
charges were later found to be groundless, for instance).
Smoking. Applicants can be asked if they know the company’s policy on
smoking at work, but they should not be asked if they smoke to avoid being
seen as attempting to discriminate against those who may be more prone to
absenteeism and higher medical claims.
Medical Conditions. It would violate the Americans with Disabilities Act as well
as federal and state civil rights laws to ask if an applicant has any medical
conditions, including AIDS or HIV.
Source: Adapted from Chuck Williams, MGMT, 8th edition (Mason, OH: South-
Western Cengage Learning, 2017), p. 228.

20-2c Step 3: Check References
and Other Background Information
• Careful checking with former employers, school authorities, and
other references can help an employer avoid hiring mistakes.
• Firms have been turning increasingly to social media to evaluate
job applicants.
• This can be controversial due to the privacy issues involved.
• Although standard reference checks on a prior employment record
do not constitute infringements on privacy, third parties are often
reluctant to divulge negative information, and this limits the
practical usefulness of reference checking.
• To encourage former employers to be honest, an employer should
obtain consent from applicants first and then ask only for appropriate
information.
• Many employers outsource performing background checks to
vendors that specialize in performing this service.

20-2d Step 4: Test the Applicants
• Employer-developed practical tests that are clearly related to the
job in question can provide extremely useful insights for selection
decisions.
• To be useful, tests of any kind must meet the criteria of validity
and reliability.
• Validity – The extent to which a test assesses true job performance
ability.
• Reliability – The consistency of a test in measuring job performance
ability.
• Ideally, testing should include consideration of an applicant’s
match with the work culture of the company and the team of
employees already in place.
• For this reason, many small business owners conduct a work-style
assessment test.

20-2e Step 5: Require
Physical Examinations
• A primary purpose of physical examinations is
to evaluate the ability of applicants to meet the
physical demands of specific jobs.
• However, care must be taken to avoid
discriminating against those who are physically
disabled.
• The American with Disabilities Act requires companies with
15 or more employees to make “reasonable” adaptations
to facilitate the employment of such individuals.
• As part of the physical examination process,
the law permits drug screening of applicants.

20-3 TRAINING AND
DEVELOPING EMPLOYEES
• The purpose of the training and development
process is to transform a new recruit into a
well-trained and an effective employee.
• Beyond the benefits of the knowledge and
skills conveyed, one study found that
employees of small and medium-sized
enterprises who participated in training and
development events were less likely to quit
their jobs and more likely to show up for work,
arrive on time, and give greater effort to their
work.

20-3a Basic Components of
Training and Development
• There are two basic components of a training and
development program:
1. Employee training – Planned efforts to help employees
master the knowledge, skills, and behaviors they need to
perform their duties.
2. Management development – Preparation of employees for
career advancement through education, job experiences,
network development, and performance assessment.
• Training new employees avoids a waste of time,
materials, and money.
• Training to improve basic capabilities should not be
limited to new hires.
• The performance of existing employees can often be improved
through additional training.

20-3b Orientation for
New Personnel (slide 1 of 2)
• An orientation program helps introduce new
employees to the firm and its work environment.
• Some phases of the orientation can be accomplished by
informal methods, whereas other phases of the orientation
must be structured or formalized.
• Supervisors should:
• Explain specific job duties.
• Outline the firm’s policies and procedures in as much detail as
possible.
• Provide a clear explanation of performance expectations and the
way in which the employee’s work will be evaluated.
• Encourage the new employee to ask questions.

20-3b Orientation for
New Personnel (slide 2 of 2)
• One way to support the orientation process is by
providing new hires with an employee handbook.
• The handbook may include an expression of the company’s
philosophy—an overall view of what the firm considers
important, such as standards of excellence or quality
considerations—and cover topics such as:
• Compensation.
• Work hours.
• Paydays.
• Breaks.
• Lunch hours.
• Holidays.
• Overtime policy.
• Employee benefits.

20-3c Employee Training
• Employee training is an integral part of comprehensive quality
management programs.
• A well-planned training program should begin on the employee’s
first day on the job, and it should be multidimensional.
• It should clearly define what quality means in the company and
explain how it is measured.
• It should describe some of the company’s past problems, outline
corrective actions that were taken, and summarize how the company
is currently reaching its quality goals.
• On-the-job training – Instruction at the place of employment,
supervised by a professional trainer or experienced employee.
• More training is accomplished on the job than through any other
method.
• Job Instruction Training – A systematic, step-by-step method for
on-the-job training of nonmanagerial employees.

20.2 Steps in Job Instruction Training

20-3d From Training to
Implementation
• The goal of a training program is to teach employees new
knowledge, skills, and behaviors that will lead to improved job
performance.
• Much of the training provided to employees is never actually
applied on the job.
• Training suggests that change is necessary, but many people find
that change provokes anxiety, so they often fall back on more familiar
methods.
• Training is more likely to be put to use if it is:
• Written down.
• Measured for results.
• Encouraged by management.
• Supported with ongoing advice from experts.

20-3e Development of Managerial
and Professional Employees
• A small business has a particularly strong need to
develop managerial and professional employees.
• Whether the firm has only a few key positions or many, it must
ensure that the individuals who hold these positions perform
effectively.
• Ideally, other staff members should be trained as potential
replacements in case key individuals retire or leave for other
reasons.
• Establishing a management development program
requires serious consideration of the following factors:
• The need for development.
• A plan for development.
• A timetable for development.
• Employee counseling.

20-4 COMPENSATION AND
INCENTIVES FOR EMPLOYEES
• Compensation is important to all employees,
and small firms must acknowledge the role of
the paycheck in attracting and motivating
personnel.
• In addition, small firms can offer several
nonfinancial incentives that appeal to both
managerial and nonmanagerial employees.

20-4a Wage and Salary Levels
• Small companies must be roughly competitive in salary
and wage levels in order to attract well-qualified
personnel.
• Payments to employees either are based on
increments of time—such as an hour, a day, or a
month—or vary with the output of the employees.
• Companies that pay wages that exceed the legal
minimum often see an improvement in recruiting and
retention.
• Small companies have reported that well-designed
compensation plans can help to boost employee work
performance and morale while reducing turnover and
minimizing discontent.

20-4b Financial Incentives
• Incentive plans are designed to motivate employees to increase
their productivity.
• Incentive wages may constitute an employee’s entire earnings or
merely supplement regular wages or salary.
• There are numerous types of incentive programs:
• Commissions.
• Piecework – Financial incentive based on number of units produced.
• Group incentives.
• Team rewards.
• Bonuses.
• Profit-sharing plans.
• Keys to developing effective bonus plans include the following:
• Set attainable goals.
• Include employees in planning.
• Keep updating goals.

20-4c Stock Incentives
• Employee stock ownership plans (ESOPs) enable
employees to own a share of the business and provide
motivation for improved productivity.
• ESOPs also can provide a way for owners to cash out
and withdraw from a business without selling the firm
to outsiders.

20-4d Employee Benefits (slide 1 of 2)
• Employee benefits – Supplements to compensation, designed to
be attractive and useful to employees.
• Employee benefits include payments by the employer for such
items as:
• Social Security.
• Vacation time.
• Holidays.
• Health insurance.
• Retirement compensation.
• Employee benefit costs to the average firm are equal to about
31.7 percent of salary and wage payments.
• Research has shown that firms offering well-designed benefits
packages—that is, plans that are tailored to the unique needs and
preferences of their workers—enjoy higher levels of employee
loyalty, retention, and engagement.

20-4d Employee Benefits (slide 2 of 2)
• A limited but growing number of small businesses now
use flexible benefit programs.
• Flexible benefit programs (cafeteria plans) – Benefit
programs that allow employees to select the types of benefits
they wish to receive.
• A number of firms have devised relatively affordable
but meaningful “perks” that are customized to their
particular situation but still signal appreciation for
workers.
• Examples: Buying pizza for everyone on Friday or giving each
employee a paid day off for his or her birthday.
• Studies have shown that employees respond more positively to
such rewards than to cash, and they lead to greater productivity
boosts.

20-5 SPECIAL ISSUES IN HUMAN
RESOURCE MANAGEMENT
• Special issues in human resource
management include:
• Co-employment agreements.
• Legal protection of employees.
• Labor unions.
• The formalizing of employer–employee
relationships.
• The need for a human resource manager.

20-5a Co-Employment Agreements
(slide 1 of 2)
• Co-employment – An arrangement to
outsource part of personnel management to an
organization that handles paperwork and
administers benefits for those employees.
• Professional employer organization (PEOs) – A
company that sets up co-employment agreements.
• For a fee of 2 to 6 percent of payroll, a PEO will manage a
company’s employee-related matters, such as:
• Overseeing health benefit programs.
• Handling workers’ compensation claims.
• Ensuring payroll tax compliance.
• Processing unemployment insurance claims.
• Filing reports required by government agencies.

20-5a Co-Employment Agreements
(slide 2 of 2)
• Using a PEO may allow a company to provide
better benefit packages, since PEOs generally
qualify for better rates.
• When a company decides to use the services of a
PEO, both parties share legal obligations as a
result—that is, the law holds both companies
responsible for payment of payroll taxes and
workers’ compensation insurance and compliance
with government regulations.

20-5b Legal Protection of
Employees (slide 1 of 2)
• Employees are afforded protection by a number
of federal and state laws, including the following:
• Civil Rights Act – Legislation prohibiting discrimination
based on race, color, religion, sex, or national origin.
• Americans with Disabilities Act.
• Age Discrimination in Employment Act.
• Occupational Safety and Health Act – Legislation
that regulates the safety of workplaces and work
practices.
• Fair Labor Standards Act (FLSA) – Federal law
that establishes a minimum wage and provides for
overtime pay.

20-5b Legal Protection of
Employees (slide 2 of 2)
• Family Medical and Leave Act – Legislation that
assures employees of unpaid leave for childbirth or
other family needs.
• The law applies to firms with 50 or more employees to
allow workers as much as 12 weeks of unpaid leave under
any of the following conditions:
• Birth and care of a newborn child of the employee.
• Placement of a child for adoption or foster care with the
employee.
• Care of an immediate family member with a serious health
condition.
• An employee who cannot work due to a serious health
condition.
• A qualified need resulting from military deployment in the
family.

20-5c Labor Unions
• Some small businesses must work with labor
unions, which may involve collective
bargaining.
• However, most small businesses are not unionized.

20-5d Formalizing Employer–
Employee Relationships
• As small firms grow, they must adopt more formal
human resource management methods, including
regular performance reviews.
• Effective performance review programs tend to bear certain
hallmarks.
• They are guided by clearly established benchmarks that are
based on goals that are SMART—that is, Specific, Measurable,
Achievable, Realistic, and Time-bound.
• They highlight the connection between individual goals and the
priorities of the business and emphasize continual
communication between managers and employees to ensure
effective ongoing performance tracking.
• Effective review meetings require sufficient time and undivided
attention, and they should begin with positive feedback before
summarizing objective judgments of attitudes and behaviors in
need of improvement.

20-5e The Need for a
Human Resource Manager
• Employment of a human resource manager usually becomes
necessary as a company grows in size.
• Conditions such as the following favor the appointment of a
human resource manager in a small business:
• There are a substantial number of employees (100 or more is often
suggested as a guideline).
• Employees are represented by a union.
• The labor turnover rate is high.
• The need for skilled or professional personnel creates problems in
recruitment or selection.
• Supervisors or operations employees require considerable training.
• Employee morale is unsatisfactory.
• Industry competition for personnel is keen.

Key Terms
behavioral interviews
Civil Rights Act
co-employment
employee benefits
employee training
Fair Labor Standards Act (FLSA)
Family and Medical Leave Act
flexible benefit programs
(cafeteria plans)
headhunters
human resource management
(HRM)
job description
Job Instruction Training
job specification
management development
Occupational Safety and Health
Act
on-the-job training
piecework
professional employer
organization (PEO)
reliability
validity
workforce diversity

Small Business Management Chapter 20 Busby LSCO

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